Spanish paper looks at business cycle’s effects on industry

A working paper published by the Bank of Spain attempts to model how different groups of industries react to the national business cycle.

In The propagation of industrial business cycles, Maximo Camacho and Danilo Leiva-Leon use Gibbs sampling, a multivariate Markov-switching model, and non-parametric density estimation approaches.

The authors find that “the number and location of modes in the distribution of industrial dissimilarities change over the business cycle”. These changes follow a “relatively stable trimodal pattern during expansionary and recessionary phases”.

They note that “there is a large heterogeneity in the distribution of business cycle similarities”. This implies that there are groups of industries with high, medium and low levels of conformity with the business cycle, with each group following “distinct distributional dynamics”.

The different groups of industries, they further note, are not moving uniformly towards an “increasingly cohesive national business cycle core”. Instead, the group with the medium level of conformity changes its volatility according to whether the economy is expanding or  not.

The model used in their paper, the authors say, should provide “a solid foundation for starting a line of research that seeks to explain the determinants of the business cycle affiliations across industries”.